Study Reviews Rapid Refund Tax Credits

Published 7:00 pm, Sunday, January 12, 2003

Associated Press Writer

While a federal tax credit aimed at the working poor helped many families pay bills in 2000, it also helped line the pockets of tax preparers, a study released Monday found.

The survey by the Brookings Institution praised the success of the Earned Income Tax Credit, which Congress established for low-income residents in 1975. But it found that tax preparers were gouging taxpayers for as much as $200 apiece to receive the refunds instantly, rather than a few weeks later.

"The good news is bigger than the bad news," said Alan Berube, the author of the Brookings study. "The good news is this is probably the best thing the federal government does for low-income communities. It's an area of concern that so much of that money is getting funneled through tax preparers who take a pretty significant cut off the top."

The study focuses on 27 communities, differing in region and size, that are part of a national campaign aimed at getting better tax assistance to poor residents. Brookings, a liberal-leaning Washington think tank, concedes that these communities have enjoyed slightly greater benefits from the tax credits than the national average.

Families qualify for the tax credits based on a complicated formula that considers their income and number of children.

Some 2 million families in the 27 sites received more than $3.4 billion in payments from the credit in 2000, an average of $1,700 or 13 percent of their annual income. However, it wasn't clear what portion of eligible families actually applied.

A study by the General Accounting Office last year found that 4.3 million taxpayers _ or 25 percent of those eligible _ received no credit in 1999. That rate is still better than participation for programs such as food stamps and Medicaid, available to many of the same people.

The high costs of tax preparation were cited nationwide, but they were particularly prevalent in Georgia, where three communities _ Atlanta, Savannah and a rural area in the southern part of the state _ had the highest percentage of rapid-refund filers. The rural territory was highest at 65.8 percent, followed by 62.8 percent for Atlanta and 59 percent for Savannah.

Six other communities in the study topped 50 percent _ New Orleans; Indianapolis; Camden, N.J.; rural North Carolina and South Carolina; Louisville, Ky., and Baltimore.

Low-income residents in the study area paid tax preparers a total of $212 million in 2000, the study found. Often, tax preparers would charge around $100 just to fill out the forms for a low-income resident, then another $100 for the loan.

Gloria Engelke, coordinator of the Atlanta Fulton Family Connection, said her group, which is funded by private donations, has been trying to contact Atlanta's poorest residents to inform them about the available credits and advise them on their finances.

"It's a tremendous problem," Engelke said of the high-cost loans. "Hopefully they can take the refund and let that be the beginning of something bigger rather than just a one-time payment to help pay Christmas bills."